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Seeding Your Hedge Fund

We've been getting all sort of emails and notes from people who are looking to seed their hedge fund. Some of them are lift-outs from other firms, others are first time funds from people with some prior experience, and others are from people with no industry experience. I've previously written about hedge fund seeders and what they typically look for. The truth is that most hedge fund managers will not qualify with a traditional seeder who is looking for the pedigree, track record, and the connections.

So what to do if you are in that other 99% of fund managers that want to start a fund? To put it simply, you have to view launching your hedge fund the same as you would launching any other startup. It takes hard work, salesmanship, persistence, and skill. Nobody really cares that you returned 100% last year based on a back-tested simulated model in ten different markets. Nobody really cares that your system is invincible and that you have worked at various firms in the industry. What really matters is that you know how to start and run a business and have great products.

In the hedge fund industry the business is managing other people's money and "institutionalizing" the business with analysts, traders, and capital raising specialists. The product is a good fund with good returns. How many traders do you know that can do both things well?

Thus, in this industry you tend to find people that are good at one or the other but not that great at both.

If you are a new hedge fund starting up, treat your business like any other business - take risk and invest time and energy accordingly. VCs love to see entrepreneurs who have invested a ton of their own capital and time into a business. Similarly, a new fund manager should invest all or most of his net worth into his own fund. VCs like to see entrepreneurs who have raised an insider round from family and friends - this shows that the person has invested a lot into the company and put relationships on the line. Similarly, a new fund manager should have some investors and have significant skin in the game.

The list can go on and on of things that are important for someone starting a new fund. I'm not going to spell everything out, but if anybody wants me to keep going on, let me know.